Event: TSLA reports its Q3 earnings today after the close. The options market is implying a 8.5% move for the event, lower than both the 4 quarter average of around 9.75% and the 8 quarter average of around 12%. The lower implied move is somewhat surprising given the recent volatility in TSLA.
Sentiment: Wall Street analysts have been mixed on TSLA throughout the stock’s advance over the past 2 years. Today there is a bit more optimism, with 13 buys, 8 holds, and 3 sells on TSLA, with an average 12 month price target of $278. The stock is still up 59% in 2014, even after the recent weakness. Short interest in TSLA remains at the low end of the 3 year range:
The total float in TSLA is about 86 million shares.
Options Open Interest: Puts actually outnumber calls by a ratio of 1.35 to 1 in terms of total open interest, rare for a stock that has had such outsized gains over the past couple of years. The average volume over the past month has favored calls, though, by a ratio of around 1.1 to 1.
The 200 strike puts and the 250 strike calls generally have the most open interest across maturities. However, the Jan15 300 call and the Jan15 150 put have the most open interest of any relevant line, at over 10k.
Price Action/Technicals: Throughout the uptrend of the past 2 years, TSLA has remained above its 200 day moving average:
The stock’s recent test of the rising 200 day ma held, maintaining the long-term uptrend. Having said that, the stock has made two lower lows and two lower highs since its high of $291.42 in early September. A break above $250, and ideally $270, would change that short-term downtrend. In the meantime, $220 is crucial support on the downside.
Volatility: 30 day implied volatility in TSLA is in line with where it was prior to last quarter’s report, but substantially lower than the pre-earnings level of the past 2 years:
One big reason is that TSLA has calmed down as a stock, with much lower realized volatility in 2014 vs. 2013. TSLA is flat over the past 8 months, with some big swings in the interim, but not nearly the level of volatility that was persistent in the rally in 2013 and early 2014.
Our View: TSLA is a very difficult company to value. There is uncertainty regarding the potential market size for electric cars, the future of battery technology, the success of the Gigafactory in bringing about cost reductions in batteries, the success of building out a recharging network globally, and numerous other obstacles along the way including but not limtied to an onslaught of competetion. Investors in TSLA are willing to take on that risk because of the prior achievements of Elon Musk, and the efficient execution of the company’s plan to date.
For us, the implied volatility looks fair to slightly cheap heading into today’s earnings report. The stock continues to trade close to its rising 200 day moving average, which poses the risk of a gap lower through that ma on today’s earnings event. We will follow up with trade ideas prior to today’s close.